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BDC Market Agenda: Monday May 3, 2021

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What’s Been Happening

In early morning of the new week – and the second week of BDC earnings season – the biggest news comes out of Portman Ridge Finance, as we’ll discuss below. Furthermore – as premium subscribers will know from the BDC Common Stock Market Recap, the sector closed on Friday April 30, 2021 just off its YTD, 1 year and all-time high on a “total return” basis, according to the S&P BDC index. There was a modest pullback in prices on the last day of the week, but we’re chalking that up to profit taking at month’s end in a red-hot sector. Looking forward into a week which will be replete with BDC earnings announcements is whether the rally that began around Halloween of last year continues into May. From a fundamental standpoint from what we’ve seen so far – with 5 BDCs reporting – there’s no reason to expect a fall, but markets work in mysterious ways. This week there’ll be earnings releases from 20 public BDCs, starting with Capitala Finance  after the close today. Given the recent announcement that the BDC is transferring its management contract to Mount Logan Capital – which is controlled by the same individuals who manage Portman Ridge – we’ll be interested to see where earnings and balance sheet stand as of March 31, 2021. No information leaked out when Capitala and Mount Logan announced their intended hook up. Most important will be seeing how much of CPTA’s SBIC debentures remain on the books as that debt needs to be repaid before the new manager can take control. A few weeks ago Capitala’s management was touting its relationship with the SBA – and its hope for a new license – as its great hope for financial salvation. Now that debt outstanding is an obstacle to be overcome to allow the BDC – with a new name, strategy and manager – in a completely different direction.


Portman Ridge Finance Corporation … announced that on April 30, 2021, it closed a private placement of $80 million in aggregate principal amount of 4.875% senior unsecured notes due 2026 (the “Notes”), which were initially assigned a BBB- rating by Egan-Jones. The net proceeds to the Company were approximately $77.7 million, after deducting payment of fees and estimated offering expenses.  

The Notes bear an interest rate of 4.875% per year, payable semiannually and will mature on April 30, 2026 and may be repaid in whole or in part, at Portman Ridge’s option, at any time or from time to time at par plus a “make-whole” premium, if applicable. The Company intends to use the net proceeds of the private placement to redeem in full its 6.125% Senior Unsecured Notes due September 2022, make investments in portfolio companies in accordance with its investment objectives, and for general corporate purposes”.

The debt being redeemed is the Baby Bond – first issued in 2017 – with the ticker KCAPL. Initially, the net proceeds from issuing KCAPL was $74.6mn but the BDC has since bought back ($0.7mn). Apparently, virtually all the net proceeds from this latest debt issuance will be used to pay-off the remaining balance of KCAPL. No exact date has been set, but we would expect that after notice is given the note holders, KCAPL will be prepaid in early June 2021.

For PTMN, this will reduce its interest expense bill by just under ($1.0mn) a year, and stretch out its debt maturity by an additional 4 years from what was coming due previously.

PTMN, though, remains highly leveraged by BDC standards and rules, with debt to equity at year-end 2020 of 1.7x and asset coverage of 156%, dangerously close to the 150% level at which BDCs are no longer allowed to borrow anymore until the coverage number is fixed. (We won’t even get into the off balance joint ventures PTMN is invested in which only increases the effective leverage numbers for those who pay attention to such things). However, we’re working off year-end 2020 numbers and PTMN – like many BDCs – may already have seen its net assets grow in value. Furthermore, the BDC is about to acquire an increasingly under-leveraged Harvest Capital (HCAP), which will change the metrics again. We won’t have a clear sense of what PTMN’s balance sheet looks like till the end of the IIQ 2021. Everything between now and then will be based on pro-forma calculations subject to change as assets – and BDCs – come and go.

For BDC fixed income investors – as we were lamenting just yesterday in the BDC Fixed Income Market Recap – the universe of potential public debt issues continues to shrink. In the BDC Fixed Income Table we had rated the chances of KCAPL being called away as LIKELY. We’ve now changed the tag to TO BE REDEEMED, and will fill in the actual date when known. As the BDC Fixed Income Table shows, there are now also 10 other debt issues that can be redeemed – like KCAPL  has – at any time and another 12 that are reaching their redemption date later in the year. With KCAPL that amounts to 23 debt issues at risk of being called in the months ahead, out of 30 in toto.

At the close on Friday April 30, 2021 KCAPL closed at $25.53. We expect – but have not done any pro-forma calculations as to how much interest might accrue before repayment – the price to drop today.


AOB

This week, we won’t be doing anything more than attempting to read and review the avalanche of new BDC results headed this way.  We’ll also be busy updating the BDC: NAV Change Table – a useful tool for measuring both short term and long term BDC performance – and the BDC Credit Table. Regarding the latter, identifying all the data is not always straightforward, often requiring carefully BDC footnotes, or manually identifying and counting each player’s underperforming and non performing companies and investments. So expect the data to dribble in unevenly. However, for those interested in getting into the BDC weeds there’s a great deal of data about credit available nowhere else and which now ranges back to IQ 2020. That provides an interesting perspective on credit trends underway at individual BDCs, and across the sector for those willing to plunge into the sea of data.

Through the week on these pages, we’ll seek to identify each day the BDC earnings reports, filings and conference calls that have caused the biggest surprises for good or ill, and which are thus most likely to result in material price adjustments in this frothy market. Last week investors were most encouraged by what they heard out of Horizon Technology Finance (HRZN). This week, there are 20 potential candidates for market reassessment. It’s going to be a busy but intriguing five business days.

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